Chapter 16 Macroeconomic Policies © 2001 South-Western College Publishing

2 Expansionary Policies 4 Automatic Stabilizers –Forces within the economy that naturally tend to counteract recessions and inflation; ex., the Social Security system –Fiscal drag - slowing effect on the economy resulting from a budget surplus –Fiscal stimulus - activating effect on on the economy resulting from a budget deficit

3 Expansionary Policies (cont.) 4 Monetary policy 4 Discretionary fiscal policy –Tax financing –Debt financing –Financing by creating money

4 Expansionary Policies (cont.) 4 Methods of increasing government spending –Increase government spending and hold taxes –Hold government spending and decrease taxes (tax rebate plan) –Increase government spending and increase taxes proportionally

5 Expansionary Policies (cont.) 4 Discretionary government spending –Transfer payments –Public works 4 Problems with discretionary spending –Difficult to end a government spending program –Problems balancing when the program is needed and when it can begin

6 Expanding the Economy 4 The Great Depression 4 The New Deal 4 Expansionary Policies of the 1960s 4 Expansionary Policies of the 1970s-1990s –Recession of –Recessions of 1980 and 1982 –Recession of

7 Contractionary Policies 4 Inflation –persistent increase in the level of prices 4 Deflation –persistent decrease in the level of prices 4 Disinflation –a slowdown in the rate of inflation

8 Types of Inflation 4 Demand-Pull Inflation: –occurs when the total demand for goods and services exceeds the available supply of goods and services in the short run 4 Cost-Push Inflation: –characterized by a spiral of wage and benefit cost increases and price increases 4 Stagflation: –inflation and high unemployment occurring at the same time

9 Measures to Reduce Total Spending 4 Automatic Stabilizers 4 Monetary Policy 4 Other Measures 4 Government Surplus –Hold taxes and decrease spending –Increase taxes and hold or decrease spending –Decrease taxes and decrease spending 4 Borrowing

10 Trade-Off Between Unemployment and Inflation 4 Phillips curve - a curve showing the relationship between unemployment and inflation 4 Hyperinflation - inflation that feeds on itself to go out of control, creating severe distortions in an economy and rendering its currency almost worthless

11 Contracting the Economy Unemploymen t Inflation